The rewards of blockchain technology: how Open Value is set to transform the loyalty sector
It’s an open secret that loyalty programmes don’t deliver the value businesses expect. Blockchain technology not only offers a way of launching new reward programmes quickly and easily, but of implementing a fundamentally more attractive economic model to keep customers coming back.
Traditional loyalty is both inefficient and ineffective. Loyalty is a $60 billion and rapidly-growing sector, but one that nonetheless fails to do what it says on the tin.
The groundwork for the loyalty industry was laid at the end of the 19th century with the rise of trading stamps: coupons with minimal value that were issued by businesses and could be redeemed for goods, often through a third party. In the 1960s and 1970s trading stamp schemes flourished — including the popular Green Shield stamps that were distributed to motorists at petrol stations throughout the UK. A combination of factors including the energy crisis, high inflation and increasing competition between businesses reduced the perceived value of these, and they either evolved into modern loyalty schemes or went into terminal decline.
The heyday of loyalty as we now understand it was the 1990s: the Air Miles era. The value of a free flight to the customer was considerable, whilst the cost to the airline of filling an empty seat on a plane that would be flying anyway was marginal. The math stacked up. But the problem arose when the same model was applied indiscriminately in other sectors, by businesses without the same fixed costs as airlines, where a freebie for the customer meant anything but marginal costs to the company. Loyalty came at a price. And so the inherent tension arose: issue a loyalty point, and you might one day be called upon to redeem it at a meaningful cost to your bottom line. Too much loyalty could, paradoxically, be bad for business.
Rather than question that underlying dysfunction, businesses instead chose to reduce the liabilities they faced by finding ways to restrict the value offered to customers. Unlike original Air Miles, current loyalty points are typically non-transferable. They may have an expiry date and any number of other conditions imposed on their use. Small wonder that customers have dozens of plastic cards and apps they never use.
The Open Value of blockchain
It’s this restriction of utility that one fintech company is characterising as Closed Value, by analogy with open and closed source software. ‘Closed Value is value that gives with one hand and takes away with the other,’ explains Rob Wilson, CEO of Sydney-based start-up, Incent Pty. ‘It’s the music you pay to download but still can’t copy for your own use; it’s the mobile phone contract that progressively locks all of your online activity into its platform and software. Even our monetary and banking system themselves, which limit and complicate the ways you can use and transfer your own money. The state of the current loyalty sector is exactly the same.’
Incent’s antidote to Closed Value comes in the form of the blockchain — the shared ledger technology that has been blazing a trail in the fintech world since bitcoin, its first implementation, came to widespread attention a few years ago. ‘Blockchain embodies Open Value,’ continues Wilson. ‘Anyone can make a transaction, anyone can send value frictionlessly to anyone else. There are no limitations. Loyalty on the blockchain is the very antithesis of the contemporary reward sector’s Closed Value mentality.’
Loyalty without liability
Rewards on the blockchain are a very different animal to the prevailing orthodoxy. The ability to transfer value freely opens a new dynamic, because once something can be transferred readily, it can also be traded on external, open markets. It has real cash value and essentially becomes a form of parallel money, rather like Air Miles once were. What has cash value for customers also has cash value for merchants.
Forward liability — the unknown cost of issuing reward points that may at some point have to be redeemed — is the bane of the loyalty sector. Instead of having merchants issue IOU-style rewards, along with the responsibility to redeem them on-demand, Incent takes a different approach. A fixed supply of Incent tokens were created on the blockchain. Instead of minting their own IOUs for customers, merchants buy Incent off the open market with a configurable percentage of the value the customer pays. These points are sent directly to the customer’s Incent smartphone app. Conversely, when the customer uses Incent to pay or part-pay for a purchase with a participating merchant, the tokens are cashed out at market price. The merchant can offer a discount, also configurable, to incentivise payment in Incent. Amongst other things, this approach effectively zeroes the merchant’s forward liability; all costs are known at point of issuance.
The rewards of Open Value
For merchants without a loyalty programme, such an approach offers a cost-effective way of launching one, reducing the up-front investment required by outsourcing infrastructure to the blockchain as well as eliminating forward liability. Moreover, there is a powerful proposition for smaller businesses, which will typically sell products not only through their own websites but through large and well-established channels like Amazon and eBay. Whilst these marketplaces attract high volumes of traffic, they also exact a substantial commission fee in return. By offering loyalty points that are really a form of smart cashback for shopping on their own sites, these businesses can split that hefty commission fee between themselves and the consumer — resulting in both healthier profit margins and customers who immediately grasp the benefits of dealing direct with the merchant.
For operators of existing loyalty programmes, there is the thorny question of just how effective their efforts really are. Open Value based on the blockchain offers not just a more efficient model — streamlining existing loyalty — but a more effective one: doing it better. The degree of flexibility involved means it’s possible to explore the benefits without risk, even adding rewards on a product-by-product basis. There are also the cross-selling benefits of working within a network of merchants who use the same reward currency, accessing a large pool of customers with a mutual appreciation for this new form of purchasing power. For small businesses that invest heavily in online marketing to on-board new customers — SEO, clickthrough advertising, email campaigns — but struggle to retain them, that is a valuable windfall in its own right.
Traditional loyalty is locked into a zero-sum battle to the death. It’s this kind of counterintuitive challenge — that it’s only possible to generate genuine value by giving it away — that sets blockchain rewards apart from their predecessors.
